Letters

In “CEOs At Risk” (CE: March 1995), Robert Lear suggests that CEOs can enhance their job security by building an independent board. This comment is especially timely in light of the Morrison Knudsen and W.R. Grace fiascoes. We find the increasing interest of CEOs and directors in corporate-governance audits and the consequent development of more effective governance procedures is spurred, in large measure, by a desire to be more insulated from shareholder attack.

A CEO who dictates to the board follows a high-risk strategy. If something goes wrong, the board will neither have the ability nor the desire to protect him or her. Even good corporate performance may not be a sufficient shield. William Fife Jr. was praised for doing an excellent job with Giddings & Lewis (stock tripled, earnings surged), but he was bounced because, according to Business Week, he “may have antagonized the board and his lieutenants with an attitude that G&L was his to run as he saw fit.”

To offer real protection to the CEO, the board must operate under procedures that encourage directors to exercise their informed and independent judgments. However, the political and social realities of the boardroom make that difficult. Given the atmosphere of comradeship and collegiality necessary for constructive group decision making, directors who aggressively demand information or challenge decisions often are viewed by their peers as disruptive, subversive, or disloyal. Accordingly, many directors are forced to choose between the role of terrorist or rubber stamp.

The task now is to develop board structures and procedures that encourage directors to ask hard questions, while allowing them to be seen by their peers as team players.

Jon J. Masters, Esq.

Partner

Christy & Viener

New York

TIES THAT BIND

To The Editor:

Recent issues of CE have covered the financial crisis in Mexico, which seems to worsen every day. Although President Clinton has decided to circumvent Congress and pursue an alternative mechanism to provide loan guarantees to the beleaguered country, I doubt Mexico‘s commitment to fiscal and monetary responsibility. In addition, I worry about the Mexican government’s close ties to the dictatorship in Cuba.

Since the collapse of the Soviet Union, Mexico has become Cuba‘s largest trading partner. Mexico should realize it cannot afford to do business with the economic disaster Fidel Castro has created. Mexico‘s trade with Cuba involves debt-for-equity swaps, the discounting of debt, concessional grants, and other preferential trade. Cuba also has become a haven for questionable investments by extraordinarily wealthy Mexican investors with close ties to the Cuban government.

Perhaps most troubling, Mexican investments in Cuba often involve the acquisition of expropriated U.S. property. The U.S. corporate community should support my insistence upon the sanctity of private property rights and condemn the dealing in stolen American property that has characterized Mexican investments in Cuba.

Anyone doing business with the Castro dictatorship does so at great risk to his or her investment. In fact, Congress, is considering comprehensive new legislation to impose further sanctions against individuals who do business with Cuba.

Rep. Lincoln Diaz-Balart (R-FL)

SPELL CHECK

To The Editor:

After reading Joe Queenan’s column, “Dya, Dya, Dya Ya Wanna Danz?” (CE: September 1994), my immediate reaction was “huh?” While well-written, the article made me wonder if he was simply being sarcastic or was really that out of touch with the music scene. Doesn’t he realize that most albums and tracks are purposely misspelled (for example, Stevie Ray Vaughn doing Jimi Hendrix’s “Voodoo Chile”-even my computer spell checker recognizes that one)?

Queenan is either a good writer who is adept at hiding his sarcasm, or he spends too much time in his office and needs to get out more.

Erik R. Deckers

WE International

Syracuse, IN

NET WORTH

To The Editor:

When top executives discuss their own compensation, seven- and eight-figure salaries typically are accepted without question, while the very possibility of limits on such pay-or its deductibility-provokes howls of indignation. Jack Lederer’s article, “How To Beat The Bureaucrats!” (CE: September 1994), focuses on how to “outflank” the regulators (snidely dismissed by the author as “bureaucrats”) and “circumvent” the rules.

He argues that any restriction on compensation “ignores competitive realities,” but this just means other companies are overpaying, too-hardly a substantive defense. Firm, consistent enforcement of a cap would leave no organization at a disadvantage.

But Lederer and others also insist that as long as return to shareholders isn’t declining, it doesn’t matter how much the CEO gets. I think it is appropriate at some point to say, “Enough is enough.” The disparity between ordinary workers and top executives, or the reality that gargantuan salaries for the latter often coincide with mass layoffs, may itself argue for limits. (Lederer implies any such concerns about fairness are “socialistic.”) In fact, return to shareholders may jump because many employees are laid off, which suggests there are human costs-along with long-term disadvantages to the organization itself-when the CEO does whatever seems most expedient in the short term to drive up the stock price and temporarily benefit the cozy alliance between himself/herself and the other shareholders.

All this aside, though, the central premise of the mainstream view of compensation is that people will be “motivated” to work harder if rewards are tied to performance. The reward may be a T-shirt for a line worker and a multimillion-dollar stock option package for the CEO, but the theory is the same. Despite the fact that it is accepted largely on faith, scores of studies I reviewed while writing a book, “Punished by Rewards” [Houghton Mifflin, 1993], demonstrate that performance quality declines when people focus on receiving a reward.

The most compelling explanation for this surprising finding is that extrinsic motivators undermine intrinsic motivation. The more people think about a reward, the less interested they may be in whatever they have to do to receive that reward. This is why I join W. Edwards Deming in opposing any payfor-performance program. When executives ask how to compensate their employees, I recommend they pay well, pay fairly, and then do everything possible to help them forget about money. The same principle applies to executives themselves.

Rather than fiddling with the mechanics of performance-based compensation, it’s time we question the psychological assumptions on which all such plans are based.

Alfie Kohn

Montclair, NJ

Jack Lederer responds: Alfie Kohn argues for CEO compensation caps, but ignores how they would be set-and by whom. Federal agency? Supreme Court? Workers’ committee? What criteria would be used?

The truth is, any system for determining caps would advance the political agenda of those administering it. They would determine the system’s rules. New administrators could redesign the system to fit their interests. Does Kohn really believe this would be “fairer” or make America more productive? I do not.

Alternatively, Kohn might advocate a simpler approach; e.g., no CEO can earn more than $1 million. This seems at odds with this nation’s self-description as the land of opportunity, not to mention the recruiting opportunities it would create for non-U.S. companies. Another foolish solution-capping CEO pay as a multiple of the lowest-paid worker’s income-would favor executives in high-wage industries, such as management consulting, over those in low-wage industries, such as food service; would ignore differences in job difficulty; and would encourage companies to out-source all their lower-paid functions.

Kohn also criticizes the alleged “cozy alliance” between CEOs and their shareholders, to the exclusion of “ordinary workers.” I doubt any public-company CEO would use the word “cozy” to describe his/her relationship with shareholders. In any case, I salute compensation programs that promote an alliance between CEOs and their shareholders, which I call “pay-for performance.”

Kohn’s paradigm of capital and labor as mortal enemies belies the truth about corporate ownership today. Employees are, in fact, major owners of the companies they work for-through ESOPs, stock purchase plans, and broad-based option programs. They also own other companies through pension funds, 401(k) accounts, mutual funds, and other investments. Consequently, it is in everyone’s interest to raise shareholder returns.

Kohn does every businessperson a favor when he challenges the assumption underlying reward systems. Nonetheless, I disagree with his assertion that extrinsic motivators “crowd out” intrinsic motivation. This assumes individuals must choose between a commitment to results or process. In my experience, “ordinary workers” (and CEOs) perform best when they understand both the goal and how to accomplish it. Most people are motivated by extrinsic as well as intrinsic rewards. Kohn believes CEOs, “ordinary workers,” and others lack the wisdom, will, and fortitude to maintain a commitment to process and results. My experience teaches me to have more confidence in American workers-including CEOs.